Minnesota deficit forecast shrinks: Shortfall now $627M, down from $1.1B

Minnesota's budget problems shrank a bit Thursday, when state finance officials forecast a $627 million deficit for the next two years, down from the $1.1 billion in red ink they projected in November.

"This is very good news for Minnesota," said Gov. Mark Dayton, adding that the 42 percent reduction in the deficit will make it easier to close.

While the improved revenue picture "does ease the pressure" to increase taxes to balance the budget, the Democratic-Farmer-Labor governor said he is not yet ready to make drastic changes in his plans to overhaul of the state's tax system.

But Republican lawmakers said the forecast throws cold water on Dayton's tax plans.

"If you're looking for evidence in this document to raise taxes, you're not going to find it," said House Minority Leader Kurt Daudt, R-Crown.

The forecast was especially good news for schools.

It projects a $295 million fund balance in Minnesota's treasury at the end of the current fiscal year June 30. State law requires $290 million of that money go to pay off part of the $1.1 billion the state owes schools in delayed payments.

The state will still owe schools $801 million, but it has now paid back nearly $2 billion of the money it borrowed over the past five years.

The new forecast means Dayton and the Legislature must make $463 million less in tax increases or spending cuts to balance the budget than they anticipated three months ago.

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It also means lawmakers will "ramp up" work on tax and spending bills, said House Majority Leader Erin Murphy, DFL-St. Paul. Legislators have been waiting for the forecast before starting to assemble a new budget.

The document shows "our economy is making steady progress but not nearly enough" to close the gap between state spending and revenue collections, said Minnesota Management and Budget Commissioner Jim Schowalter.

The main reason for the shrinking shortfall is growing tax collections. The state expects to collect $323 million more in revenue than predicted in November, with $297 million more coming from higher-than-projected income tax payments. But that's less than a 1 percent revenue increase.

Spending estimates for the next biennium are down $117 million, largely because of savings in Medical Assistance payments to health care providers negotiated by the Health and Human Services Department, said state Budget Director Margaret Kelly.

The state now expects to collect $36.1 billion in general fund revenue over the next two years, up about 1 percent from $35.2 billion in the current biennium.

Dayton has proposed rewriting the state's tax code, increasing state taxes by $2.1 billion over the next two years with top earners and businesses paying the brunt of the costs. The plan would increase spending from $35.2 billion in the current two-year cycle to $37.8 billion in the 2014-15 biennium. That's a 7.6 percent increase.

Dayton said he plans to submit a revised budget proposal to the Legislature in about two weeks.

While he hasn't decided what changes he will make, he said he's inclined to propose offering businesses an up-front sales tax exemption on purchases of capital equipment, which would provide a $125 million tax break, and restoring the renters' property tax credit level that was reduced about $80 per renter on average by the 2011 Legislature. That would cost about $70 million.

He is not ready to scale back the most controversial part of his tax proposal, which calls for lowering the sales tax rate from 6.875 percent to 5.5 percent and extending it to many goods and services that are currently exempt. That has sparked fierce opposition, especially from business leaders who contend a tax on business-to-business services would have a devastating impact on the state economy.

Many DFL lawmakers have expressed reservations about Dayton's sales tax initiative, but Senate Majority Leader Tom Bakk, DFL-Cook, said his colleagues still want to reduce the sales tax rate and expand the tax base to provide "significant tax reform" and more money for education and property tax relief.

The state has been on a budget roller coaster for the past decade, lurching from deficit to deficit. Dayton and DFL lawmakers say they want to put it on a more stable track.

The governor also has proposed a new top income tax rate on married couples earning more than $250,000 a year. House Speaker Paul Thissen, DFL-Minneapolis, said he expects that increase to be part of the final tax package.

Thissen said House DFLers also would like to pay off the remaining $801 million in IOUs to schools. He said they will determine the level of investments they want to make before paring tax increases.

Republican leaders credited their policies of holding down taxes and spending during the previous two years, when they controlled the Legislature, for sparking economic growth that reduced the deficit.

But state economist Tom Stinson said national economic growth, albeit slow, contributed more to the state's fiscal improvement.

"As important as Minnesota is to the national economy, there is more going on than just Minnesota policies," he said.

The national economic outlook has not change much since the November forecast, when slow growth was predicted, Stinson said. The housing sector is expected to lead to more growth over the next two years.

The day before across-the-board federal spending cuts, known as sequestration, are set to kick in, he said the uncertainty caused by the political brinksmanship in Washington is slowing business investment and hiring.

Global Insight Inc., the state's macroeconomic consult, predicts the sequester will last two months before Congress and the president reach a budget agreement in April.

That would mean slower growth, but no recession, Stinson said. "It's not going to bring the economy to its knees."

But Minnesota would see its job growth slow from an estimated 40,000 new hires this year to 35,000. He noted Minnesota will be among the states least affected by the cuts because it receives a relatively small amount of federal funding.